In the aftermath of the pandemic, two clear trends seem to have emerged for fund investors. The variety of sustainable funds available through tactical strategies like ETFs and factor-driven investment funds has surged nearly has much as their popularity. Additionally, the response to the repercussions of Covid-19 has increased the interest for defensive investment approaches.
ESG Investing – An ever-expanding frontier
The Climate Crisis has made ESG concerns a crucial element of investors’ lives. This year particularly, with the COP26 conference in Glasgow, there will be a major assessment on how much progress has been made. Unsurprisingly, fund managers keep broadening the scope of their investments, finding new and innovative ways of expanding the way they allocate funds, and while this is not a new trend, there are still opportunities to innovate and push boundaries.
According to Stanislas Mesland, Head of Equities Strategies at BNP Paribas’ Quantitative Investment Strategies (“QIS”) team, factor investing is the latest investment option to back this trend. “ESG integration in factor investing intends to improve the ESG features of the portfolio while keeping the factor exposure at a very high level,” he explains, “It enhances our offer by considering not only companies’ financial related metrics but also non-financial ones, to enhance the stock selection. Our research shows that by combining factors and ESG, investors can improve long-term performance, reduce risk and increase diversification.”
BNP Paribas’ THEAM Quant fund spearheads the ongoing innovation in ESG investing, ensuring that its clients have every channel at their disposal to align their investment and sustainability goals.
Here are two examples of how THEAM Quant stays ahead of the curve:
This recently-launched ETF represents a unique combination of growth descriptors to identify the most promising companies for investors. What is really innovative about this product is the additional integration of ESG criteria in the stock selection, consistently combining the pursuit of growth with positive ESG impacts. The underlying has currently delivered exactly what it has been designed for: outperformance of its benchmark, both from a financial and extra financial point of view.
The bank continues to accelerate ESG integration into its factor offer range, allowing clients to maintain factor selection as their priority, whilst delivering on sustainability goals.
This fund, which secures that 90% of the highest Net Asset Value (NAV) reached, aims to increase the value of assets over the medium term by maintaining its exposure to a dynamic basket of global equities which are systematically selected on the basis of two main criteria, their financial robustness and their ESG performance through metrics like the companies’ carbon emissions and their forward-looking energy transition strategy. Protection is achieved via an innovative option based approach that aims at reducing the risk of cash lock compared to more traditional protection algorithms.
No offence taken…
While ESG themes are constantly increasing in popularity, markets’ response to recent events has entailed a rising surge for defensive strategies. It seems increasingly clear that recovery from the health crisis will be uneven across nations, which has created room for uncertainty regarding certain economies. This unpredictability is only aggravated by inflationary and monetary tightening concerns.
Gilles Edouard Espinosa, Head of Option-based Strategies at BNP Paribas’ QIS team, notes that, “While risk aversion is a clear response to the outlook in markets right now, well-built strategies can still find opportunities for positive income. We combine over 30 years of experience in equity derivatives with a finely tuned expertise in QIS, especially in options and risk mitigation strategies, which has seen great success in our longer-running strategies and allowed them to hold up performance even through the testing times of the last few years.”
Under these circumstances, investors demand access to a range of strategies that cover changing market conditions. This year BNP Paribas’ THEAM range launches an innovative defensive approach to volatility, leveraging on the 4 years track record of one of its volatility income strategies:
This fund seeks to provide the benefits of long volatility exposure during pronounced market stress scenarios, while exhibiting positive carry on average. The strategy delivers an optimized way of getting long exposure to VIX® futures, which reflect the market’s expectations of US equity volatility. It aims to secure on-average positive carry thanks to the daily sale of short-term out-of-the-money put options on S&P 500®. This income-generating component leverages on a similar concept implemented in the US Premium Income fund.
The fund, launched in 2017, seeks to deliver a target premium income by implementing a fully transparent and systematic put-writing strategy on a selection of US stocks. After 4 years of operation, the fund has shown its ability to generate a recurrent alternative income in a low yield environment. In 2020, despite the February – March equity market gap, the strategy has helped clients navigate the Covid-19 health crisis successfully and managed to rebound quickly. It was helped by its flexible sector-allocation feature, moving from its 2020 techs and healthcare overweight into industrials, financials and more cyclical areas in Q2 2021.
For more information, do not hesitate to contact us.
The investments in the funds are subject to market fluctuations and the risks inherent in investments in securities. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay, the funds described being at risk of capital loss.
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